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UPDATE: Fonterra maintains forecast dairy payout with supply down rather than demand up

Fonterra Cooperative Group, the world's biggest dairy exporter, maintained its forecast payout to farmer shareholders for the current season, saying recent gains in whole milk powder prices were due to reduced supply rather than increased demand.

The Auckland-based company held the forecast at $4.70 per kilogram of milk solids, down from a record $8.40/kgMS last season, while maintaining guidance for a dividend range of between 25 cents and 35 cents per share.

Prices for whole milk powder, the nation's key export product, have gained 45 percent at Fonterra's GlobalDairyTrade auctions since December after plunging last year, and recent drought conditions in New Zealand raised speculation the payout might be increased as limited supply pushes up prices.

The AgriHQ Snapshot Farmgate Milk Price had indicated that if the GDT prices from the latest GlobalDairyTrade auction were achieved across the entire season it would equate to a milk price of $6.15/kgMS.

But chairman John Wilson said the GDT gains, which were on low volumes at this stage of the season, only reinforced the current forecast payout rather than warranted an increase, and that global commodity prices remained volatile.

"New Zealand volumes are down, with continued uncertainty in milk production due to climactic conditions in New Zealand with droughts in Canterbury, Marlborough, Central Otago and North Otago," he said in a statement. "We are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses."

Fonterra will provide a full business update when it reports first-half earnings on March 25.

WMP prices rose 13.7 per cent in the latest GDT auction to $US3,272 per tonne but US$3500 per tonne is what is required in the second quarter to maintain the forecast, said Fonterra chief financial officer Lukas Paravacini.

"We're getting very close and we'll see in the next few GDTs how strong that turnaround in sentiment is going to be but we are well into the season and a lot of our milk is already contracted," he said.

The turnaround is likely to have more impact on next season's opening forecast in May but Fonterra doesn't provide an outlook on that figure at this stage.

Milk production from Fonterra's 10,600 suppliers is likely to be 3.3 percent down this season due to the impact of the drought.

Paravacini said although production for the year was still 1.7 per cent above last year, the cooperative still sees the 3.3 percent drop as the likely outcome for the season.

Fonterra tracks production daily and Paravacini said it was currently 5 percent below the level at this time last year due to the drought and farmers not bothering with supplementary feed because of the low payout price.

The uplift in global dairy prices was due to lower supply rather than increased demand, he said.

"That's another reason confidence in the milk price is still fragile," he said.

Supply from New Zealand is down, the US was also having problems because of industrial action which has closed ports on the west coast, and there has also been some reduction out of Europe. On the demand side, China is still not back to the levels it had been and the Russian ban on imports has not been lifted, he said.

Westpac senior economist Michael Gordon said it's forecast of a $5.00/kg farmgate milk price for the end of the season requires further modest price increases at the next few GlobalDairyTrade auctions.

"We're reasonably confident that this will happen, as drought conditions in New Zealand put a squeeze on the global milk supply."

There are two more GDT auctions before Fonterra releases its first-half results and Gordon said an upgrade may be likely then.

Units of the Fonterra Shareholders' Fund, which are entitled to the dividends on the exporter's shares, rose 0.3 percent to $6, and have slipped 0.5 percent this year.